CPO still offers good margins although at 5 year low

Tuesday, 26 August 2014

By: HANIM ADNAN

Based on the efficient planters’ average cost of production of between RM1,200 and RM1,300 per tonne, he is optimistic that oil palm plantation companies would be able to generate about RM727 to RM827 per tonne CPO as profit margins, said Malaysian Estate Owners Association president Boon Weng Siew (inset).

PETALING JAYA: Efficient oil palm plantation companies in Peninsular Malaysia can still reap good margins this year, even though crude palm oil (CPO) is currently trading at its five-year low of about RM2,027 per tonne, said Malaysian Estate Owners Association president Boon Weng Siew.

Based on the efficient planters’ average cost of production of between RM1,200 and RM1,300 per tonne, he is optimistic that oil palm plantation companies would be able to generate about RM727 to RM827 per tonne CPO as profit margins.

Boon pointed out that the sluggish CPO performance was mainly attributed to the combination of bearish factors such as the rising palm oil stockpile, record soybean and corn harvests in the United States, delays in the nationwide implementation of Malaysia’s biodiesel mandate and the poor export outlook to China, given credit-tightening issues among the banks there.

“However, I believe all these (bearish factors) are just short term in nature. The CPO price will soon climb back above RM2,300 per tonne by November onwards, as the high production season will taper off and the nationwide B5 biodiesel programme takes off in December,” he added.

According to Boon, Malaysia has actually put in place one of the best CPO price-stabilising mechanisms – the B5 biodiesel programme, which is the blending of 5% palm methyl ester with 95% diesel.

He noted that the Government should quickly push for the nationwide implementation of the B5 biodiesel programme so that “some 500,000 tonnes of CPO can be taken out of our high domestic palm oil stockpile, which stood at 1.68 million tonnes as at July this year”.

On the other hand, Hong Leong Investment Bank (HLIB) Research, given its less-than-optimistic sector outlook, has downgraded the plantation sector from “neutral” to “underweight”.

Year-to-date, the CPO spot price has averaged at RM2,563 per tonne. HLIB Research noted that CPO prices would have to recover sharply and maintain at RM2,900 per tonne for the remaining 3.5 months to achieve its previous average price projection of RM2,700 per tonne for 2014.

“Given the absence of near-term positive price catalysts, we lower our average CPO price projection for 2014 by RM300 per tonne to RM2,400 per tonne,” it added.

It has also lowered the 2015 average CPO price by RM400 per tonne to RM2,300 per tonne, given the lower risk of El Nino’s impact on the palm oil supply.

“Our lower projected average CPO price is premised on the absence of a major weather impact.

“While a lower CPO price environment will reignite interest in biodiesel (particularly when the logistics hurdles are solved), we believe that CPO prices will need to stay sufficiently low in order for biodiesel to be economically viable,” it added.